factory that's listed at $100 on its BS for $80. Its tax rate is 40% - Accounting test
Hello, can someone explain to me this question? It was in the M&A's test.
A company runs into finanicla sistress and needs cash immediately. It sells a factory that's listed at $100 on its BS for $80. Its tax rate is 40%. What is their cash flow for the period
a) -12
b) 68
C)80
D)20
E) None of the above
And what was the change in net working capital?
a) 12
b) -68
C) -20
D)-12
E) None of the above
CF for the period would be an increase of $88, no?
-20 pre-tax -> 40% tax shield -> NI decreases by 12.
CFS: -12 from NI, add back 20 since the loss is non-cash, add 80 to investing section for cash inflow -> 88 increase
Am I missing something?
Sales tax on asset = $80 (1 - 40% tax rate) = $48 + $20 depreciation = $68 cash flow
In regards to NWC: is it -$12 ?
Not sure about my answers, hopefully someone can clarify !
Above explanation for CFS is correct
For NWC, i guess it j depends on how you define nwc (always best practice to keep technical questions conversational!), and most likely it excludes cash, and PP&E is not a current asset, so i would think there would be no change in NWC.
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